Economy And Sanctions Derail Russia’s Central Asian Investments

After years of embarking on promising forays into Central Asia’s economy, Russia is being forced to pare back its ambitions.

The starkest retreat of Russian money is seen in Kyrgyzstan, whose parliament voted overwhelmingly last week to cancel a deal with Russian companies to build two major hydropower facilities. The decision came after MPs concluded that the projects were going nowhere.

President Almazbek Atambayev ruefully admitted during a press conference in December that the conditions were not right. “In the current situation, when the economy of Russia is not on the rise, let’s just say, and the trend for oil prices is only going downward, we see that these agreements… well, for objective reasons they cannot be fulfilled by the Russian side,” he said.

Failure to get Kambarata-1, which was to be built jointly with Inter RAO UES, and the Upper Naryn cascade, a joint project with RusHydro, off the ground comes as a major blow for Kyrgyzstan. Authorities had nourished dreams of selling excess electricity to Afghanistan and Pakistan for much-needed cash.

The dam agreements were sealed in September 2012, when Russian President Vladimir Putin traveled to Bishkek and high oil prices made everything seem possible. During that visit, Russia wrote off $489 million worth of debts owed by Kyrgyzstan.

The Kambarata-1 hydropower plant was expected to cost $2 billion to complete and eventually generate around 4.4 billion kilowatt hours annually. Upper Naryn, which is intended to be composed of four staggered hydropower plants, was designed to have an annual production of 942.4 million kilowatt hours.

There is a slim chance the agreement could be revived.

“In the event of a positive vote (on cancelling the deals), the Russians will have six months to either cancel the deals too, or not to do so,” Bakhadyr Suleimanov, a deputy with the junior coalition partner Ata-Meken party, told reporters.

Some see the deal cancellation move as a bluff. “As far as I can tell, Kyrgyzstan considers the threat of cancelling (the deal) as an element of bartering and a means of securing money from its partner all the same,” said Russian political analyst Nikita Mendkovich.

But major Russian businesses are also withdrawing from other projects in the region.

Last August, LUKoil managed to sell off its 50-percent stake in Kazakh oil producer Caspian Investment Resources to China’s Sinopec for $1.2 billion. Sinopec already owned the other half of Caspian Investment Resources. The sale eventually went through after a period of arbitration, giving Sinopec total ownership of a company that controls fields containing an estimated 200 million barrels of proven oil and gas reserves.

In at least one instance, Western sanctions against Russian companies are disrupting investments. Work on the Tsentralnoye offshore field on the Caspian Sea, which is being developed by LUKoil, Gazprom and Kazakhstan’s state-owned KazMunayGas, was halted last year because some of the required drilling technology is now banned from sale to Russian companies.

“We cannot get the drilling equipment because it belongs to non-Russian companies. To build another drill rig just for one well would be illogical, so we and Gazprom have taken a pause, and we will wait until either other rigs free up, or sanctions are lifted,” LUKoil chief executive Vagit Alekperov told Russian state television in December.

Tsentralnoye is located near Kazakhstan’s border, but lies within Russia’s section of the Caspian. Putin and Kazakhstan’s President Nursultan Nazarbayev reached a delimitation deal in October that finally opened the way for work on the concession to begin. The field was discovered in 2008 and is being developed by the Tsentralnaya Oil Company, in which KazMunayGas holds a 50 percent stake. LUKoil and Gazprom each hold 25 percent in the venture.

The highest-profile Russian retreat from Central Asia’s energy market is in Turkmenistan. In 2007, Russia was hailing its conclusion of an historic agreement to build a new pipeline from Turkmenistan along the eastern shores of the Caspian Sea. Completion of that route would likely have served as a spoiler to any prospects of any Turkmen gas ever being sold directly to the European Union.

Things quickly went wrong, however, as Moscow evidently began to realize the projected gas supplies might prove excess to requirements. And so if Russia was buying 45 billion cubic meters of Turkmen gas through an existing pipeline in 2008, volumes had plummeted to 10 billion cubic meters by 2010.

China has eagerly secured as much gas as it could from Turkmenistan, and plans are in motion to eventually export to Afghanistan, Pakistan, India and the EU.

Russian Foreign Minister Sergei Lavrov is visiting Turkmenistan’s capital, Ashgabat, this week for talks that are seen as an attempt to soothe a troubled relationship. But with the gas issue unresolved, analysts believe a normalization of bilateral relations cannot be expected any time soon.

Differences in the energy sector “will inevitably lead to a protracted crisis in relations between the two countries,” Andrei Medvedev, executive director of Russian think-tank Center for Political Technologies, told Nezavisimaya Gazeta newspaper.

The withdrawal from Central Asia is particularly paradoxical considering that the Eurasian Economic Union (EEU), a trading bloc comprising Russia, Armenia, Kazakhstan, Belarus and Kyrgyzstan, is finally up and going after years of preparations. Results there have been disappointing.

“The impact of membership in the EEU for Russia’s partners has yet to be felt, as its common market is not planned to go into effect until 2025. Nonetheless, trade between several EEU members and Russia has declined over the past year, raising doubts about the long-term viability of the bloc,” the Carnegie Endowment for International Peace noted in a report published on January 25.

And where Russia’s fortunes fade, China looks set to advance. “The outlook for slow growth in the years to come portends a bleak future for Russia’s ties with Central Asia, and it likely will continue to be eclipsed by China as an economic partner to Central Asia,” the Carnegie Endowment report said.

As the report noted, in 2013 alone, China announced $64 billion in infrastructure deals in the region. After factoring in a further $46 billion in investments pledged by Beijing as part of its Silk Road Economic Belt vision, Russia’s own ambition begin to look feeble.

Annual trade turnover between China and the five nations of former-Soviet Central Asia has increased from $1.8 billion in 2000 to $50 billion in 2013, according to the International Monetary Fund. Beijing’s trade figures with the region overtook Russia’s in the late 2000s and have not looked back since.

But Mendkovich cautioned against counting Russia out, and said the drop in investment activity in Central Asia was just a temporary reaction to the crisis. “Pushing Russia out of the regional market seems improbable, since large infrastructure projects in Central Asia, such as the construction of hydropower plants, do not give immediate yields, and it is improbable there will be serious competition,” Mendkovich said.

“The whole world is suffering because of the current crisis, there is no extra money to go round, even from China,” he said.